Mountain or Molehill?

Paul Krugman is rethinking everything he thought he knew about American productivity growth:

In their paper, van Ark etc. identify the service sector as the main source of America's pullaway -- which is the standard argument. Within services, roughly half they attribute to distribution -- roughly speaking, the Wal-Mart effect. OK.

But the other half is a surge in US productivity in financial and business services, not matched in Europe. And all I can say is, whoa!

First of all, how do we even measure output of financial services? If I read this BEA paper correctly, we more or less use "checks cashed" -- or, more broadly, the number of transactions undertaken. This may be the best we can do, but it's a pretty weak measure of actual work done by the financial system.

And given recent events, are we even sure that the expansion of the financial system was doing anything productive at all?

Now, he's the Nobelist, but is it not a huge leap to see productivity growth in "finance and business services" and conclude that it was all financial tomfoolery? Finance and business services includes a lot of the activities that have undergone a revolutionary change thanks to the increasing power and ubiquity of the desktop computer, and to improved communications technology. How much of this is structured financial products and how much is Excel and email? (And yes, diffusion of those technologies in European offices did lag).